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Inflation Rises in Q1 2014 But Remains Within Target


The BSP announced today the publication of the 50th issue of the quarterly BSP Inflation Report covering the period January-March 2014. The full text has been released in electronic format (as a PDF file) on the BSP website (http://www.bsp.gov.ph/publications/regular_inflation.asp).  The BSP Inflation Report is published as part of the BSP’s efforts to improve the transparency of monetary policy under inflation targeting and to convey to the public the thinking and analysis behind the Monetary Board’s decisions on monetary policy. 

The following are the highlights of the Q1 2014 BSP Inflation Report:

  • Headline inflation rises. Year-on-year inflation accelerated to 4.1 percent in Q1 2014 from the quarter-ago rate of 3.4 percent due to higher food and non-food inflation. Food inflation increased as the prices of most food commodities rose owing to some tightness in domestic supply conditions, while higher electricity rates and domestic petroleum prices drove up non-food inflation. Similarly, core inflation was higher than the rate registered in the previous quarter. The number of CPI components showing inflation rates above the 5.0 percent threshold likewise increased, accounting for a bigger proportion of the CPI basket.
  • Domestic demand remains buoyant. Real gross domestic product (GDP) expanded by 6.5 percent in Q4 2013, bringing the full-year 2013 GDP growth to 7.2 percent, higher than the National Government’s growth target of 6.0-7.0 percent for the year. Output growth was driven by robust household spending, exports, and capital formation (particularly durable equipment) on the expenditure side, and by solid gains in the services sector on the production side. Indicators of demand in Q1 2014 continue to show positive readings. Vehicle and energy sales remain brisk, while the Purchasing Managers’ Index (PMI) continues to signal strong growth in new orders and production, especially in the services sector. The outlook of consumers and businesses for the following quarter has also turned more favorable, supporting the continued strength of aggregate demand in the coming months.
  • The outlook for global growth is broadly steady. Growth in the US economy continues to solidify, driven by strong private consumption and non-residential investment. The expansion in Japan has also proceeded at a steady pace, aided by accommodative monetary and fiscal policies. At the same time, the recovery in the euro area has gained traction owing to improving domestic demand and rising consumer and business confidence. By contrast, indicators point to subdued growth dynamics in major emerging markets, particularly China and India. Looking ahead, global economic prospects are expected to improve broadly, but the risks to the outlook remain tilted to the downside. For emerging markets (EMs) in particular, a key downside risks emanates from increased financial market volatility due in part to uncertainty over the ongoing normalization of monetary policy in the US. Meanwhile, global inflation pressures are seen to remain broadly subdued. The inflation environment in advanced economies (AEs) continues to be benign given sizeable spare capacity. However, inflation has risen in some EMs owing to domestic supply factors.
  • Local financial markets experience volatility but regain some stability. Increased risk aversion during the quarter was driven largely by generalized concerns over the pace of the US Federal Reserve’s tapering of its quantitative easing measures as well as the sustainability of growth in major emerging markets such as China. This has resulted in a moderate depreciation of the peso relative to the previous quarter. However, markets rallied on indications of sound Philippine macroeconomic fundamentals and reports of strong corporate earnings, supporting the narrowing of the country’s debt spreads and the recovery in the stock market index towards the latter part of the review quarter.  
  • The BSP maintains its policy rates but adjusts the reserve requirement ratio. During its monetary policy meetings on 3 February and 27 March 2014, the Monetary Board (MB) decided to keep policy interest rates steady based on its assessment that the future inflation path was likely to stay within the announced target ranges for 2014 and 2015. Meanwhile, inflation expectations continue to support the within-target inflation outlook, although analysts expect inflation to rise going forward due largely to pending electricity rate adjustments, a weaker peso, and potential increases in food and oil prices. At the same time, the MB decided to raise the reserve requirement of banks and non-banks with quasi-banking licenses effective on 11 April 2014 to help guard against potential risks to financial stability that could arise from continued strong liquidity growth and rapid credit expansion.
  • Prevailing inflation dynamics and monetary conditions also suggest that monetary policy rates remain appropriate but that the space to keep them unchanged has narrowed. Latest baseline forecasts indicate that inflation will likely settle within the inflation target ranges for 2014 and 2015. However, the risks to future inflation remain skewed to the upside, with potential price pressures emanating from pending petitions for adjustments in utility rates and from possible increases in food and oil prices. At the same time, inflation expectations have trended higher and are moving near the upper end of the target range for 2015. Buoyant domestic demand also suggests that the economy can accommodate measured adjustments in monetary conditions.

Moreover, domestic liquidity growth has remained strong after the full unwinding of the non-trust account placements in the BSP’s Special Deposit Account (SDA) facility in November 2013, resulting in the robust growth in bank lending to support economic activity. The continued strong expansion in liquidity and credit could potentially exert inflationary pressures and contribute to the build-up of financial stability risks.

On the whole, the BSP continues to have monetary policy space to address the challenges that could undermine the BSP’s objective of maintaining price and financial stability. Going forward, the BSP stands ready to deploy appropriate measures as needed to ensure sustainable, non-inflationary, and inclusive economic growth.

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